Pachter: Nintendo is a "bad company", Iwata a "poor CEO"

"If you don't like that answer, Nintendo fans, deal with it."

Industry analyst Michael Pachter has blasted Nintendo CEO Satoru Iwata and controlling shareholder Hiroshi Yamauchi for their "poor" running of the company, labelling Iwata as a "pretty poor CEO" who has "done a very poor job" running Nintendo.

Pachter vented his opinion of the exec and his company during the latest episode of Pach-Attack, where he was asked whether he thought Nintendo may have to leave the hardware business.

"Having to? No, never," Pachter said. "Wanting to? Not while their biggest shareholder is Mr. Yamauchi who I believe is around 70, 71 years old, and not while Mr. Iwata is CEO. I think those two guys are deeply rooted in tradition in the past, in what made Nintendo great. And I think that the Nintendo formula for success for the last 35 years has been manufacture a console, sell it at a profit, and support console sales with proprietary software. And then when your console sells well, collect royalties from third-parties for the privilege of putting their software on the console."

However, Pachter believes "that model is broken for Nintendo.

"I think Nintendo is no longer able to compete the way they did in the past and sell their consoles at a big profit," he continues.

"I think that the Wii, when it first launched they were probably making about $100 of profit per unit. I think the DS when it first launched was probably generating about $50 of profit per unit. The 3DS I think is barely making a profit. The Wii U I think is barely making a profit - I'm talking 5 or 10 bucks per unit."

Pachter suggests that Nintendo's hardware profits are "so low that it really doesn't make sense for them to be in the hardware business.

"But I don't think they realise that yet," he adds. "And that's a business decision, so this is a criticism of Mr. Iwata, not of Reggie [Fils-Aime, President & COO, Nintendo of America]. Reggie and the marketing team, they're great, they do what they can. You have to... play with the cards that you are dealt. They're dealt the Wii U, they're going to do the best they can to market it and the best they can to get you excited about the software. So I love the US marketing guys, I think they're phenomenal and I have no problem with any of those guys."

But Pachter doesn't feel the same way about Iwata.

"I think Mr. Iwata's a pretty poor CEO," he continues. "I think he's done a very poor job running the company. I have a neutral rating on Nintendo, but I have to say only because their cash level supports their current share price. It's a bad company that doesn't make money."

Nintendo's future in the hardware business has been questioned following the poor reception to the company's latest console Wii U.

"Your question, will they have to exit the console-making business?," continued Pachter. "The good news is, Nintendo has something around 8 or 9 billion dollars - billion - of cash on their balance sheet. When they lose money, they lose something like a billion dollars. And frankly, I think next year their losses will be smaller. I think if they lose money it'll be $100m, $200m. They can run for 50 more years and keep losing money and they're not going to go out of business. So they aren't forced to do anything."

Pachter also says that he's "surprised that Nintendo investors have watched the stock go from 63,000 Yen down to 8,000 Yen and have stuck with the management team.

"The stock has dropped to cash value so there's no value in investing in it. The only way anybody is going to make money going forward is if Nintendo suddenly starts making money, and they're not going to make money on hardware, not at these prices."

He continued: "If Nintendo's business is trying to make a profit, once they conclude they aren't going to make any money on hardware, of course they should exit the hardware business. And if they were to put their software on multiplatform they would probably sell twice as much software. So I think Nintendo, if they were to follow the SEGA route, would be immensely more profitable, but it's not in their DNA...

"When Yamauchi no longer is a shareholder [and] Iwata is no longer there, maybe, but I'd say they're gonna keep fumbling around and keep trying to make money in hardware. Don't think it's going to work. I'm not particularly optimistic about an investment in Nintendo stock and I am a stock market guy so I've been pretty good about stock market investments.

16 Comments

User Comments

Sure there are some truths, such as poor decisions imo, but to label a company that could stay in business for 50 years while still losing money bad is a laughable statement. Bad in what way? Bad in that they don't mimic how most other companies operate, particularly western?

Still I would like Nintendo to change in a lot of ways. It's like a company run by your grandparents.

I generally like to think of Pachter as well informed and rational, but this just sounds like he's trying to argue that Nintendo is doomed because they aren't playing catch up. I'm also a bit confused as to how he manages to ignore Nintendo's success over the last six years.

Firstly, this pairing - or Iwata, at least - is responsible from pulling Nintendo out of the era where GBA had outstayed its welcome and Gamecube was nothing more than a dead platform with half a great library. Incidentally, herein lies the first of his oversights: Nintendo have not had enough third party support for royalties to be a considerable factor since the mid nineties. How he can argue that they've been a pillar of their business model recently, I don't know.

Wii and DS could have been sold at an initial loss for a year or so and still be remarkably profitable because they were marketable platforms. The differential in hardware profits would have been minimal in this context, especially considering how old the hardware was. The cost of those units must have been tiny.

This happens to blend into his next comment. 3DS and WiiU won't be making much profit at the moment but that doesn't matter. Nintendo, like other companies, see the virtue in the loss leader model for their new platforms, and project a profit later down the line to make the platforms viable business propositions. Like I said, if DS and Wii were being sold at, effectively, cost price, would it have been an issue a year later? Nope, they'd probably just have a bigger market share and more publisher support in place of some cash.

I also take issue with Pachter implying that investment will rely solely on hardware profits. They have a lot of revenue streams, and hardware is not the one that investments should be predicated on in an era of content being king. It seems all he's getting at here is that Nintendo can't make money on hardware at the moment, and that this means they should duck out of the hardware business. It's like he's ignoring Nintendo Marketing 101: build the hardware and software, but sell the experience.

It's like saying taxi drivers shouldn't buy a vehicle just because it's a pure loss. Taxi drivers aren't in the business of buying and selling "hardware", they invest in the building blocks so they can go on to sell a service.

I think Nintendo have made some severe missteps in putting 3DS and WiiU out to market, but there's nothing wrong with their business model.

Ok forgive me if I'm wrong but he states 'Not while their biggest shareholder is Mr. Yamauchi who I believe is around 70, 71 years old.' Wikipedia (and other sites) state he is 85 (http://en.wikipedia.org/wiki/Hiroshi_Yamauchi)... that makes Pachter 15 years off.